The Bureau of Economic Analysis will revise how it measures several components of the Personal Consumption Expenditures price index beginning with the September data release. The methodological update is expected to reduce reported core PCE inflation and could influence how inflation data is interpreted by policymakers and businesses.
Key Takeaways
- The Bureau of Economic Analysis is updating the methodology for selected PCE price index components.
- The revisions affect software, portfolio management and legal services measurements.
- Economists estimate the updated methodology could lower reported core PCE inflation by about 0.2 percentage point.
- The revised calculations will be applied retroactively to the previous five years of data.
- The updated methodology will first appear in the September release of PCE inflation data.
The PCE inflation methodology used by the Bureau of Economic Analysis is set to change beginning with the September release of the Personal Consumption Expenditures price index. The agency announced revisions affecting several components of the index, with economists estimating the updated calculations will lower reported core PCE inflation while leaving underlying consumer prices unchanged. The revisions are significant because the Personal Consumption Expenditures price index serves as the Federal Reserve’s preferred measure of inflation.
Bureau of Economic Analysis Revises PCE Inflation Methodology
The Bureau of Economic Analysis (BEA), part of the U.S. Department of Commerce, will introduce revised calculations for three components of the Personal Consumption Expenditures price index. The changes will first appear in the September data release and will also revise historical data covering the previous five years.
The revisions apply to the measurement of software, portfolio management services and legal services. Together, these categories represent a relatively small share of overall consumer spending, but adjustments to their calculation are expected to influence reported core inflation.
Core PCE inflation excludes food and energy prices to provide a measure of underlying inflation trends. Federal Reserve policymakers monitor this measure when assessing price stability and evaluating monetary policy, alongside other inflation and economic growth indicators.
The Bureau of Economic Analysis periodically updates its statistical methods to improve the accuracy of national economic accounts. According to the agency, the latest revisions are intended to better reflect actual economic activity and improve the measurement of selected service categories.
Software Price Measurement Changes
One of the largest adjustments affects software prices.
Under the current methodology, the Bureau of Economic Analysis relies on pricing information that includes some computer hardware products. Economists have noted that prices for certain storage devices have increased because of demand related to artificial intelligence infrastructure, causing software-related inflation measures to capture movements that are partly attributable to hardware.
The revised methodology incorporates additional Bureau of Labor Statistics price data for software-related services, including video game software and web hosting, to better isolate software price movements.
Economists expect this adjustment to reduce measured inflation within the software component of the Personal Consumption Expenditures price index.
Software and Financial Services Calculations Receive Updated Treatment
Portfolio Management Fee Calculations
The Bureau of Economic Analysis is also revising how it measures investment management services.
Investment advisers commonly charge fees based on a percentage of assets under management. Under the previous methodology, rising financial markets could contribute to higher measured prices because larger asset values resulted in higher fees.
The updated calculation instead incorporates a methodology that compares industry income with the amount of services performed. Economists expect this approach to reduce measured inflation within the portfolio management category because it distinguishes changes in assets under management from changes in service prices.
Legal Services Data Sources
The legal services component will also receive a methodological adjustment.
Previously, the Bureau of Economic Analysis relied primarily on Consumer Price Index data compiled by the Bureau of Labor Statistics. The revised methodology replaces that source with Producer Price Index data for legal services.
Unlike the software and portfolio management revisions, economists expect this change to increase measured inflation within the legal services category. However, estimates indicate that the upward effect is likely to be smaller than the reductions associated with the other revised components.
Core PCE Inflation Readings Expected to Decline Under New Formula
Several economists estimate the combined effect of the revisions will reduce reported core PCE inflation by approximately 0.2 percentage point once the updated methodology is implemented.
The reduction reflects changes in statistical calculations rather than changes in actual consumer prices.
The Personal Consumption Expenditures price index differs from the Consumer Price Index because the two measures use different weighting systems and data sources. Although both track inflation, the Federal Reserve has long relied on the PCE measure when evaluating its inflation objective. The update follows recent reports examining elevated PCE inflation readings and their role in monetary policy discussions.
Recent estimates have shown a wider-than-usual gap between the two inflation measures. Economists expect the revised methodology to narrow part of that difference by changing the calculation of several service categories.
The revisions will affect reported inflation figures beginning with the September release while also updating previously published data covering the preceding five years.
The Bureau of Economic Analysis stated that the methodological changes are routine statistical improvements designed to maintain the accuracy and reliability of its estimates.
Revised Methodology Extends Across Five Years of Historical Data
The Bureau of Economic Analysis conducts annual revisions to national economic statistics, including updates to historical data when methodological improvements are introduced.
Under the latest revision, the agency will recalculate affected Personal Consumption Expenditures price index data for approximately five years. Applying the updated methodology retrospectively allows historical inflation data to remain comparable with future releases.
Annual revisions commonly include updated source information, revised seasonal adjustments and methodological improvements that reflect better measurement techniques.
Because the changes are applied consistently across multiple years, economists will be able to compare inflation trends using the same statistical framework rather than a combination of old and new methodologies.
The Bureau of Economic Analysis indicated that the revisions were developed by career staff as part of its regular statistical review process.
Updated Inflation Measures Carry Implications for Economic Analysis
The revised PCE inflation methodology will influence how economists, policymakers and businesses interpret inflation reports after the September release.
Because the Federal Reserve monitors core PCE inflation as one of its primary indicators of price stability, changes to the calculation may affect comparisons between future and historical inflation readings. The revisions also complement ongoing analysis of the Federal Reserve’s rate outlook and broader inflation pressures affecting consumers.
The revisions do not reduce prices paid by consumers or businesses. Instead, they alter how selected components are measured within the Personal Consumption Expenditures price index.
Businesses that monitor inflation to support budgeting, pricing and financial planning may see modest changes in reported inflation data once the revised methodology takes effect. Analysts are also expected to incorporate the updated historical series into future economic forecasts.
The Bureau of Economic Analysis stated that the revisions are intended to improve statistical accuracy by using data sources and calculation methods that more closely reflect the services being measured.
Frequently Asked Questions
What is the PCE inflation methodology?
The PCE inflation methodology refers to the statistical approach used by the Bureau of Economic Analysis to calculate the Personal Consumption Expenditures price index, the Federal Reserve’s preferred measure of inflation.
Which components of the PCE price index are being revised?
The revisions affect software, portfolio management services and legal services within the Personal Consumption Expenditures price index.
When will the updated PCE inflation methodology take effect?
The revised methodology will first appear in the September release of Personal Consumption Expenditures price index data and will include revisions covering the previous five years.
Why is core PCE inflation expected to decline after the revision?
Economists estimate the updated statistical methods will reduce measured inflation for software and portfolio management services by enough to outweigh an expected increase in the legal services component.
Will the revised methodology change previously published inflation data?
Yes. The Bureau of Economic Analysis plans to apply the revised methodology retroactively to approximately five years of previously published Personal Consumption Expenditures price index data.
